Friday, April 13, 2012

"The question of extractive elites: Bankers and the public sector may both be enemies of growth"

From the Economist Buttonwood column:

THE developed world has a growth problem. Of 34 advanced economies,
28 had lower GDP per head in 2011 than they did in 2007. Forecasts for
growth in the current year are anaemic. This sluggishness is generally
perceived to be a hangover from the financial crisis of 2007 and 2008.
But might the problem be structural rather than cyclical?

In their new book, “Why Nations Fail: The Origins of Power, Prosperity
and Poverty”, Daron Acemoglu and James Robinson, a pair of economists,
suggest that many countries are bedevilled by economic institutions that
“are structured to extract resources from the many by the few and that
fail to protect property rights or provide incentives for economic
activity.” In contrast, “inclusive” economies distribute power more
widely, establish law and order, and have secure property rights and
free-market systems.

In an extractive economy, such as the Belgian Congo and its successor
state, Zaire, a narrow elite seizes power and uses its control of
resources to prevent social change. Such economies can achieve growth
for a while, particularly when (as with the Soviet Union in the mid-20th
century and, the authors argue, China today) resources are being
transferred from the unproductive agricultural sector into
manufacturing. But they run out of steam eventually.

The authors place the developed world in the “inclusive” category
since they have, by definition, achieved economic success. But their
description of extractive economies should ring one or two alarm bells
in the minds of Western readers. “Because elites dominating extractive
institutions fear creative destruction”, the authors write, “they will
resist it, and any growth that germinates under extractive institutions
will be ultimately short-lived.”

There are two potential candidates for extractive elites in Western
economies. The first is the banking sector. The wealth of the financial
industry gives it enormous lobbying power, including as contributors to
American presidential campaigns or to Britain’s ruling parties. By
making themselves “too big to fail”, banks ensured that they had to be
rescued in 2008....MORE